Lavin v. Data Systems Analysts, Inc.

• Decision Date: 29 September 1977
• Docket Number: Civ. A. No. 76-2763.
• Citation: 443 F. Supp. 104
• Parties: Aaron M. LAVIN v. DATA SYSTEMS ANALYSTS, INC., et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

443 F. Supp. 104

Aaron M. LAVIN v. DATA SYSTEMS ANALYSTS, INC., et al.

Civ. A. No. 76-2763.

United States District Court, E. D. Pennsylvania.

September 29, 1977.

Mitchell A. Kramer, Philadelphia, Pa., for plaintiff.

Astor & Welss, Philadelphia, Pa., for individual defendants.

Goldman & Goldman, Philadelphia, Pa., for Data Systems.

OPINION AND ORDER

A. LEON HIGGINBOTHAM, Jr., District Judge.

I.

On February 24, 1975 the Board of Directors of Data Systems Analysts, Inc. (hereinafter Data Systems), a Delaware corporation, adopted an employee bonus program under which up to 40% of the corporation's pre-tax profits would be distributed each year as bonuses ". . . to such key personnel as shall be determined by a committee established by the Board of Directors. . . ." Pursuant to Rule 23.1 of the Federal Rules of Civil Procedure, Aaron Lavin, a holder of Data Systems securities, has brought this derivative action against several of the corporation's executives and directors,¹ alleging that by enacting the employee bonus program these defendants violated Section 10(b) and Rule 10b-5, of the 1934 Securities Act² and Title 8, Section 144 of the Delaware Corporation Law. Additionally, plaintiff claims that the defendants have breached their fiduciary duty and have committed common law fraud. Jurisdiction is alleged under Section 27 of the 1934 Securities Act.³

Presently before this Court are defendants' joint motions to dismiss the complaint under Fed.R.Civ.P. 12(b) and (c) and for a Protective Order under Fed.R.Civ.P. 26(c)(2). For the reasons herein stated, defendants' motion to dismiss is GRANTED; as the complaint has been dismissed there is no need to rule on the Motion for Protective Order.

The details of the challenged employee bonus program can be briefly stated. Under the program, the Board of Directors appoints a committee to annually select those key personnel who would receive some portion of Data Systems pre-tax profits. The Board was authorized to distribute up to 40% of the corporation's profits each year. The actual percentage of the pre-tax profits to be distributed is determined each year by the Board. The purpose of the program, as stated by Donald J. Bezahler, Secretary of Data Systems, in the April 23, 1975 notice of the Annual Stockholders Meeting, is to ". . . attract and retain the service of key personnel . . .", in an effort to expand and develop Data Systems' business operations. Approximately twenty employees, including officers, were found eligible for the bonus as of April 23, 1975. Complaint, Exhibit C, pp. 4, 5.⁴

During the annual meeting of May 15, 1975 the program was submitted to and approved by the stockholders. Complaint, pp. 4-5.

Plaintiff contends that the Board of Directors (defendants herein) owned or controlled a majority of Data Systems' common stock at the time of the May 16, 1976 annual meeting⁵ and continue to hold such a majority.⁶ Plaintiff argues that the sole purpose of the employee bonus plan was to benefit the individual defendants, and, therefore, the program constitutes "a fraud or deceit upon Data Systems and its shareholders." Complaint, p. 5.

It is further alleged that defendants failed to disclose to stockholders that the program involved what, in plaintiff's view, is self-dealing, conflict of interest and utilization of corporate funds for strictly personal benefit. Such alleged nondisclosures form the gravamen of the § 10(b) claim.

I find that plaintiff has failed to state a cause of action under Section 10(b) and Rule 10b-5. It is therefore unnecessary to discuss defendants' other contentions.

Defendants have submitted the affidavit of Donald J. Bezahler in support of their argument that venue in the Eastern District of Pennsylvania is improper and have moved for dismissal of the complaint under Rule 12(c).

For purposes of this motion, however, I will exclude this affidavit from the record, and will treat this motion as one to dismiss under Rule 12(b)(6). I will therefore consider only the pleadings and memoranda in support thereto.

II.

It is axiomatic that a court, in considering a motion to dismiss for failure to state a cause of action under Rule 12(b)(6), ". . . will consider as admitted, viewing the same in the light most favorable to plaintiff, all facts contained in the complaint and every inference fairly deductible therefrom," Melo-Sonics Corporation v. Cropp, 342 F.2d 856, 858-859 (3d Cir. 1965). Accord Husbands v. Commonwealth of Pennsylvania, 359 F.Supp. 925, 929 (E.D.Pa. 1973). A motion to dismiss must be granted, however, if it appears to a certainty that the plaintiff would not be entitled to relief under any set of facts which could be proved in support of his claim. Jenkins v. McKeithen, 395 U.S. 411, 421-422, 89 S.Ct. 1843, 1849, 23 L.Ed.2d 404 (1963); Husbands v. Commonwealth of Pennsylvania, supra; Frederick Hart & Co. v. Recordgraph Corporation, 169 F.2d 580, 581 (3d Cir. 1953).

Plaintiff's allegations fail to state a cause of action under Section 10(b) and Rule 10b-5 on two grounds. First, there has been no "manipulative or deceptive" conduct. And, second, even if there were, it was not "in connection with the purchase or sale of securities."

III.

Section 10(b) prohibits the use of "any manipulative or deceptive device or contrivance" in contravention of the rules of the Securities and Exchange Commission. The Supreme Court has recently held that a cause of action under Rule 10b-5 exists "only if the conduct alleged can be fairly viewed as `manipulative or deceptive' within the meaning of the statute." Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 1301, 51 L.Ed.2d 480 (1976). The defendants' conduct in the implementation of the bonus program was neither manipulative nor deceptive.

Plaintiff's allegations of deception are as follows:

Data has failed to disclose any proxy statements, annual reports, or other documents, that the Program involved self-dealing, conflict of interest, and utilization of corporate funds for strictly personal benefit, or that the Program was devoid of a legitimate or justifiable corporate purpose. Data further failed to disclose that bonuses under the Program would be given primarily to Officers and Directors of Data and that, as holders of a majority of the common stock of Data, they were, in effect, able to approve the Program regardless of the vote of the outside shareholders.

Complaint, pp. 5-6.

None of the omissions alleged by plaintiff are material. Another district court has made the following statement about allegations of directors' improper motives:

It is bemusing, and ultimately pointless, to charge that directors perpetrated a "material omission" when they failed to (a) discover and adjudge faithless motives for their actions and (b) announce such a discovery in reporting the products of their managerial efforts and judgment. The securities laws, while their central insistence is upon disclosure, were never intended to attempt any such measures of psychoanalysis or reported self-analysis. The unclean heart of a director is not actionable, whether or not it is "disclosed," unless the impurities are translated into actionable deeds or omissions both objective and external.

Stedman v. Storer, 308 F.Supp. 881, 887 (S.D.N.Y.1969).

The April 23, 1975 Notice of the Annual Meeting, which has been incorporated into the Complaint, informs the shareholders of the plan's purpose, the maximum percentage of pre-tax profits that the Board could use for the plan, the body that would select the personnel who would receive these bonuses and, finally, that officers and directors are eligible for such bonuses. As of April 23, 1975 only two facts were undisclosed: one, the specific personnel who would receive the bonuses; and two, the dollar amounts of this bonus.

In Abramson v. Nytronics, Inc., 312 F.Supp. 519 (S.D.N.Y.1970), the court addressed itself to the disclosures required by Rules 14a-9 and 10b-5 for proxy materials. The same standards are applicable in this context. The court here stated:

Defendant-directors were obligated to make a full and fair disclosure of those facts which a stockholder would need in order to make an intelligent and informed decision on Gulton's proposed purchase of its shares. They were not, however, required to present to the Gulton shareholders all the arguments that could be made against their recommendations. The proxy provisions of Rules 14a-9 and 10b-5 are aimed at disclosure of all material facts, not at ensuring an exhaustive, dispassionate, and evenly balanced presentation of conflicting interpretations of the facts given.

Abramson, supra, at 524. I find that Data Systems shareholders received all the information necessary to make an informed decision. The defendants' conduct, therefore, was not deceptive.

I also find that it was not manipulative. Manipulation, in the securities law context, "refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity." Santa Fe, supra, 430 U.S. at 476, 97 S.Ct. at 1302. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976). The Supreme Court has specifically excluded corporate mismanagement involving unfair treatment of shareholders by a fiduciary from its definition of manipulation. Santa Fe, supra, 430 U.S. at 475, 97 S.Ct. at 1302. Plaintiff's complaint makes no allegations that the defendants intended to affect the market activity of Data Systems' stock.

Thus, plaintiff's complaint should be dismissed because it fails to properly allege the "manipulative or deceptive" conduct necessary to a 10b-5 cause of action.

IV.

An alternative basis for dismissing the complaint is the absence of connection between the alleged misconduct and the purchase or sale of any security as required by Section 10(b) and Rule 10b-5.

Plaintiff contends that three...